A U.S. firm holds an asset in Israel and faces the following scenario:
$\begin{array} { l l l l }
\hline & \text { State 1 } & \text { State 2 } & \text { State 3 } \
\hline \text { Probability } & 25 \% & 50 ^ { \circ } \text { o } & 25 \% \
\text { Spot rate } & \$ 0.30 \text { ILS } & \text { \$0.20 ILS } & \$ 0.15 / \text { ILS } \
\text { P* } & \text { ILS2,000 } & \text { ILS5,000 } & \text { ILS3,000 } \
\text { P } & \$ 3,000 & \text { \$2.500 } & \text { \$750 }
\end{array}$
where,
P* = Israeli new shekel (ILS) price of the asset held by the U.S. firm
P = dollar price of the same asset

-The "exposure" (i.e.the regression coefficient beta)is: (Round your final answer to nearest whole dollar and intermediate calculations to 6 decimal places) Hint: Calculate the expression Cov(P,S)/Var(S)

Question

A U.S. firm holds an asset in Israel and faces the following scenario:
$\begin{array} { l l l l } 
\hline & \text { State 1 } & \text { State 2 } & \text { State 3 } \
\hline \text { Probability } & 25 \% & 50 ^ { \circ } \text { o } & 25 \% \
\text { Spot rate } & \$ 0.30 \text { ILS } & \text { \$0.20 ILS } & \$ 0.15 / \text { ILS } \
\text { P* } & \text { ILS2,000 } & \text { ILS5,000 } & \text { ILS3,000 } \
\text { P } & \$ 3,000 & \text { \$2.500 } & \text { \$750 }
\end{array}$
where,
P* = Israeli new shekel (ILS) price of the asset held by the U.S. firm
P = dollar price of the same asset

-The "exposure" (i.e.the regression coefficient beta)is: (Round your final answer to nearest whole dollar and intermediate calculations to 6 decimal places) Hint: Calculate the expression Cov(P,S)/Var(S)

Quizplus · Accepted Answer

The exposure is the regression coefficient beta, which is calculated as the covariance of P and S divided by the variance of S. The covariance is calculated as the expected value of the product of the deviations of P and S from their means, and the variance is calculated as the expected value of the squared deviation of S from its mean.Using the given data, we can calculate the covariance and variance as follows:Covariance = E[(P - E(P))(S - E(S))]= (3000 - 2083.33)*(0.30 - 0.216667) + (2500 - 2083.33)*(0.20 - 0.216667) + (750 - 2083.33)*(0.15 - 0.216667)= 277.78Variance = E[(S - E(S))^2]= (0.30 - 0.216667)^2*(0.25) + (0.20 - 0.216667)^2*(0.50) + (0.15 - 0.216667)^2*(0.25)= 0.002167Therefore, the exposure is:Beta = Covariance / Variance= 277.78 / 0.002167= 128,940.00Rounding to the nearest whole dollar, the exposure is 12,894.00.

A US Firm Holds an Asset in Israel and Faces the the Following